A place to find news, observations, statistics, information on undergraduate (BSc and BA economics) postgraduate (MSc economics) and academic analysis of important issues for China's economy including economic growth, inequality, stockmarket, shares, exchange rates, the environment, foreign direct investment, WTO and much more

Wednesday, 31 October 2007

China is now the single most important contributor to world growth, in terms of both market and purchasing-power-parity (PPP) exchange rates.

Its economy continues to grow at breakneck speed, turning it into a driving force in the global economy.

Market exchange rates are those prevailing in the foreign exchange market, while the PPP exchange rate is defined as the rate at which the currency of one country needs to be converted into that of another country so as to be able to purchase the same amount of goods and services in each country. Use of PPP exchange rates gives a greater weight to emerging market economies in the global growth aggregates.

China's economy gained further momentum in 2007, growing at 11½ percent, and is expected to grow by 10 percent in 2008. Other emerging markets are also growing strongly. India continued to grow at more than 9 percent in 2007, and Russia grew by almost 8 percent.

In fact, these three countries alone accounted for more than one-half of global growth over the past year. Other emerging market and developing countries have also maintained robust expansions. Rapid growth in these countries counterbalanced continued moderate growth in the United States (see "IMF Forecasts Slower World Growth in 2008").

Looking ahead

Emerging market countries are reaping the benefits of careful macroeconomic management over the past decade and are benefiting from favorable external conditions, including high commodity prices. But there are uncertainties about the outlook.

In China and India, growth may not slow as anticipated if recent monetary policy tightening proves insufficient to cool domestic demand growth. But the main downside risk is that continued turbulence in global financial markets could disrupt financial flows to emerging markets and trigger problems in domestic markets. This is particularly a concern in countries with large current account deficits and substantial external financing needs. And recent buoyant activity and rising commodity prices (see related article on commodity prices) are leading to tightening resource constraints, which could put upward pressure on inflation.

But despite these and other risks linked more directly to the global outlook, the IMF expects emerging markets to remain strong in the foreseeable future.

Some of the stock valuations are simply way out. It is true that China is a large market with a lot of potential but even so....

This article at least gives some justification for the high prices. Galbraith in his book on the great crash (an excellent read) speaks of similar justifications for the high prices on Wall Street just weeks before the Wall Street Crash of 1929. The same happened with the dot.com crash or 2000.

SHANGHAI (Reuters) - China has the world's largest commercial bank, its biggest aluminum maker, its No. 2 oil firm and its fourth-largest investment bank. It has five of the world's 10 biggest companies, versus three for the United States.

Never mind that outside their home markets, the companies' business operations are dwarfed in size and sophistication by Western and Japanese giants.

Soaring prices on the Shanghai Stock Exchange have propelled listed Chinese firms' capitalizations -- including shares held by government and institutional investors that have not yet become freely traded -- to the top of global tables.

But with China's economy on track for its fifth consecutive year of double-digit percentage growth, the market is simply looking farther into the future to value stocks, others say. And that future justifies such prices -- except perhaps for resource stocks.

"The current A-share bull run is very similar to what happened previously in Japan, Korea and Taiwan," when those economies and markets took off in the 1980s and 1990s, says Miao Junwei, CEO of ABN AMRO TEDA Fund Management.

Shanghai's stock market is up five-fold since the start of 2006. It is trading at above 40 times projected earnings for this year, dwarfing the S&P 500's 16 times. But it is still well below the 70-plus hit by Taipei at its peak in 1990.

../

M&A TO BOOST GROWTH

Acquisitions may spur growth of China's blue chips in the next few years. At home, the government wants to consolidate industries to improve efficiency, and Beijing is encouraging investment abroad as it seeks access to resources and markets.

../

In general, fund managers argue stocks related to consumer spending growth may deserve their high valuations. Lower labor costs, first-mover advantages and huge local networks of branches and customers may help these firms beat foreign competition.

Fund managers are most skeptical about valuations in the resources sector. Oil giant PetroChina (0857.HK: Quote, Profile , Research), for example, which last week raised $8.9 billion in a Shanghai share offer, is now the world's second largest oil firm by market value, second only to Exxon Mobil (XOM.N: Quote, Profile , Research).

In contrast to consumer stocks, resource firms' margins are in the long run expected to depend mainly on the cost at which they can obtain their raw material from abroad, while the global commodities markets mean they are unlikely to get away with charging their customers any premium.

"I really don't understand why China's resource firms should command such high premiums to their overseas peers," a senior portfolio manager at a major Chinese house said.

"PetroChina, like its foreign counterparts, sells its crude oil at international market prices and it does not hold any advantage in terms of reserve replacement."

ABSTRACT: This chapter assesses China's integration into the global trading system by examining areas of international political-economic friction associated with its increased trade.We use a number of newly constructed data sets to examine tensions associated with its rapidly increasing trade and the trade policy commitments that China and its trading partners have undertaken as part of its 2001 WTO accession. With respect to China's exports, we examine data on WTO members' use of antidumping and their discriminatory treatment of Chinese firms prior to and following accession. We conclude that the application of antidumping against China has become more discriminatory since its 2001 accession. Furthermore, evidence from a regression analysis rules out the theory that pre-accession discrimination is associated with foreign targeting of high import tariff Chinese products as a WTO accession negotiation strategy. We also provide evidence that WTO members are also discriminating against China's exports by substituting use of new import-restricting China-safeguard policy instruments.Next, with respect to China's imports, we examine data on China's antidumping use - now the WTO's fifth most frequent user of antidumping - by targeted sectors and countries. We also provide evidence from products within China's largest sectoral user of a positive relationship between the size of the accession year tariff liberalization and the subsequent resort to antidumping protection after accession. Finally, we examine China's experience in managing frictions associated with its growing role in world trade through formal WTO dispute settlement proceedings.______________________________

and

"China's Experience Under the Multifiber Arrangement (MFA) and the Agreement on Textiles and Clothing (ATC)" NBER Working Paper No. W13346

ABSTRACT: This paper analyzes China's experience under U.S.apparel and textile quotas. It makes use of a unique new database that tracks U.S. trading partners' performance under the quota regimes established by the global Multifiber Arrangement (1974 to1995) and subsequent Agreement on Textiles and Clothing (1995 to 2005). We find that China was relatively more constrained under these regimes than other countries and that, as quotas were lifted, China's exports grew disproportionately.______________________________

Chinese Student and Scholar Associations (CSSA) worldwide claim to be neutral non-for-profit organizations dedicated to helping Chinese students overseas. But a close look at their websites reveal strong links to the Chinese Communist Party (CCP).

Dr Wei Liu decided to speak openly about his experience as the CSSA Chairman from 1998 to 1999 in Manchester and what he learned about the CCP's control over CSSAs. Dr Wei Liu currently works as a research fellow in the Department of Chemical Engineering at Birmingham University in England.

NTDTV: "So do they do this out in the open, or is it kind of an unspoken secret that the Chinese Communist Party runs these organizations?"

Dr. Liu: "It's a secret because only a few key members of the Association know this fact. The majority of the students and scholars, they don't know."

NTDTV: "Can you tell me where this direction is coming from? Is it coming from Beijing?"

Dr. Liu: "Yes, the Chinese Consulate or Embassy...they carry out the political agenda and policies from the Chinese Communist Party".

NTDTV: "So what sort of damage do you think this sort of spying does to Western society and universities? Do you think it's dangerous for the students?"

Dr. Liu: "I don't think most of them would like to do this, but it seems they are only fooled by the Chinese Consulate."

NTDTV: "So this has actually been going on for years? Has it being going on for a long period of time?"

Dr. Liu: "Yes. Until now the CSSA still does the same as they did 10 years ago".

We also meet up with Dr Gui Hua Li who was a part of the CSSA organization until her email got cut from the mailing list after sending information about China's live organ harvesting trade. At that point she began to wonder.

NTDTV: "So, Dr Li can you tell me a bit about you're experience of being a part of the CSSA organization?"

Guihua Li, Former Cambridge CSSA Member: "The CSSA is supposed to be loosely coordinated, but really it's tightly controlled. Some of the students haven't got a clear sense of what is right and what is wrong. They just feel...well, we will just do what the Chinese Communist Party asks us to do. Yeah, they just do it, because they get used to that kind of control. They don't realize the Party has no right to control them. They live outside in another country but they feel ... oh, the Party is still looking after them."

NTDTV: "Do you think they get incentives or do they benefit financially?"

Guihua Li: "Oh, everybody knows, of course they do, and the Chinese Embassy always gives money to the CSSA from the very beginning."

But what will students, parents and professors do when they discover that the Chinese Communist party has long infiltrated their university campuses? The MI5 or the FBI are looking deeper into this issue.

Interestingly, Epoch Times have also issued a correction to their original article:

CORRECTION:On Oct. 16 The Epoch Times published on its Web site an article from New Tang Dynasty TV titled "Chinese CSSA Spy Ring Exposed in the U.K." The title of this article gave a misleading impression of the article's contents, which discussed evidence that the Chinese Communist Party controls Chinese Student and Scholar Associations, not evidence for a particular spy ring.

In addition, the article incorrectly asserted that Dr. Wei Liu had been a spy for China, which is not true. And the article also incorrectly identified Dr. Liu as a Professor at the University of Birmingham. In fact, he is a research fellow at the University of Birmingham. The Epoch Times regrets the errors.

China’s graduation to middle-income country status and its emergence as an aid donor and world power is arguably the most outstanding developmental achievement of the past five decades. This remarkable transition has been neither smooth nor linear, but punctuated by societal convulsions and underpinned by widespread environmental degradation. China’s environmental crisis is now one factor threatening to jeopardise future domestic growth prospects; it is also increasingly impacting other developing countries. The sheer pace of change is taking us into unchartered territory.

From a resource consumption perspective, China’s role as a major importer of primary commodities, manufacturer and subsequent exporter not only provides the world with affordable goods, but provides huge opportunities for commodity exporters, primarily in the developing world.

China is now one of the most important global buyers of oil, minerals and timber, and agricultural commodities such as soybean and palm oil. China has huge cash reserves, and Chinese companies often outbid western competitors for oil and mineral concessions, sometimes paying very high premiums, which should benefit the producing countries.

Saturday, 27 October 2007

Thanks to Chinagame (a new blog added to our blog roll here at ChinaEconomicsBlog) is an article on US FDI into China. Academics and students should have free access.

This is fairly basic business school stuff. The question is who actually believes the "fallacies" from the title? Anyone who knows about FDI flows into China should be aware that the US is only one player in many. Hong Kong, Taiwan are two of the biggest investors (Hong Kong still being seen as foreign - in my work I tend to broadly split FDI between OCED and "others" as well as more detailed breakdowns).

Information on some of the other "myths" that are bust will benefit the casual observer but more importantly it touches on the "off-shoring" issue that is politically so sensitive. It is often the case that multinationals that invest in China do not do so at the expense of domestic employment. The argument is that in the US the firm simply hires more "white collar" workers such as lawyers, accountants and most importantly, designers and R&D researchers, using the money saved on labour costs elsewhere.

------------------------------------------------

Facts and Fallacies About U.S. Fdi in China

LEE BRANSTETTERCarnegie Mellon University - H. John Heinz III School of Public Policy and Management; National Bureau of Economic Research (NBER)

C. FRITZ FOLEYHarvard Business School; National Bureau of Economic Research (NBER) October 2007

Abstract:Despite the rapid expansion of U.S.-China trade ties, the increase in U.S. FDI in China, and the expanding amount of economic research exploring these developments, a number of misconceptions distort the popular understanding of U.S. multinationals in China. In this paper, we seek to correct four common misunderstandings by providing a statistical portrait of several aspects of U.S. affiliate activity in the country and placing this activity in its appropriate economic context.

From the inbox. Well worth a listen to get an introduction to this politically sensitive and also economically important topic.

-----------------------------------------------

This week on Bloomberg Radio®, "Bloomberg on the Economy" host Tom Keene spoke for an hour with Nobel Laureate Robert Mundell of Columbia University as well as an hour with Barry Eichengreen, professor of economics and political science at U.C., Berkeley. Professor Mundell discussed the globalization of world currencies and China's holding of U.S. assets, the 2007 Nobel Prize winners, and also mentioned a new screenplay he is writing about a viceroy in 1907 Canton. Tom Keene and Professor Eichengreen focused on the IMF's "reform agenda," global exchange rate policies and the changing weight of the dollar and pressure on China to revalue the yuan. We thought you might find the interviews of interest. Please feel free to follow the link below to listen to their conversations:

Wednesday, 24 October 2007

After once being hammered by antidumping measures (duties levied against imports sold more cheaply abroad than at home) by pretty much everyone such "prosecutions" declined.

It appears that antidumping is coming back again and China is in the firing line. Such a trend, that the EU is not part of yet, is being driven by the US. The motivation for which deserves close attention. China bashing remains a popular past time.

Countries’ official blocks on imports have fallen to record lows, although that trend seems to be reversing as complaints against unfair competition from China increase.

New data show that “trade defence instruments” (TDIs) – principally “antidumping” duties levied against imports sold more cheaply abroad than at home and “countervailing” duties charged against government-subsidised goods – dropped to the lowest in the first half of this year since the World Trade Organisation was created in 1994.

But Cliff Stevenson, a trade consultant who collects the figures, said there had been a rapid uptick in the past three months. If the trend continued, he said, “antidumping will still be relatively low post-WTO creation but not a record low and certainly significantly above the 1980s average”.

Recent high global commodity prices have prevented many companies successfully filing antidumping cases, as it is harder to show they have been damaged by artificially low import prices.

The EU brought no antidumping cases at all in the first six months of the year, though it has brought several since and recently extended antidumping duties against Chinese energy-saving light bulbs for a year.

China has been by far the most common target of antidumping cases this year, and India the biggest user of antidumping duties.

With rising complaints from its companies against China, the US has opened a new front that the EU may follow. Washington recently reversed a two-decade precedent and imposed countervailing duties against Chinese glossy paper – used in books and packaging – despite designating China as a “non-market economy” in which prices are not set by open competition, making government subsidies hard to determine.

Since then, several more US countervailing duty cases have been opened against China as add-ons. One Washington lawyer said: “Since many subsidies are not specific to individual industries, if you prove it once you can go after the whole Chinese economy.”

Last week the US Commerce Department confirmed the duties and in the case of one Chinese company raised them to 44 per cent, more than four times higher than its preliminary levy.

Beijing has hit back by seeking to have the US duties declared illegal in the World Trade Organisation, a case that could set a vital precedent but one that may take years to resolve.

So far the EU, although it is watching the US case closely and reviewing its own use of trade defence instruments, has not followed suit with a countervailing duty case.

But Peter Power, spokesperson for Peter Mandelson, the trade commissioner, said: “I can confirm that the Commissioner is looking at the case in the context of the TDI review to see whether we should take a more proactive approach in this area.”

Mr Mandelson is holding a preliminary debate with EU member states this week.

Simon Johnson of the IMF has a new blog that, as you can imagine, never strays too far away from issues related to China.

In today's post he talks about the impact of Global Imbalances and how they might be corrected. The blog has started well and I hope Simon Johnson can keep it this level of blogging productivity. Given his lofty position one can not help wondering whether he shouldn't have more important things to do. However, putting a cheery face on the IMF could be considered good public relations.

I took part in a frank discussion over global imbalances very early Sunday morning, organized by Anton Brender and Florence Pisani of Dexia. The topic was their book on this issue and -- most important -- what could follow, particularly after the summer's financial turbulence.

My main argument was that the first phase of global imbalances is likely over. In this phase, the primary imbalance was between the US current account deficit on the one hand and current account surpluses in oil producing countries, Japan, China and few other places. The main issue, which Anton and Florence make clear in their book, was one of flows, i.e., how to get capital from countries that were saving "too much" (or at least more than they wanted to invest) to the US, which was saving "too little" (or less than it was investing.)

We should of course keep in mind that during this first phase, a number of things changed. For example, initially -- in the late 1990s -- US firms invested more than they saved and this accounted for most of the US side of the imbalance. More recently, since around 2000-2001, US firms have saved more than they invested but US households have reduced their savings. So things change in the nature of this imbalance, and it has in the past been dangerous to make predictions about behavior.

Still, it now appears likely that US households will save more -- after all, few now expect property prices to continue to rise and other asset prices might also be regarded as high. This doesn't have to be a big, rapid or disruptive change, but it will likely raise savings in the US and help take the current account down to 5 1/2 percent (or smaller?) in 2008.

But if the US current account deficit is smaller, what does that imply for other countries' current accounts? Remember, that savings and investment have to add up around the world. So if the US has a smaller deficit and we want to sustain broadly the same level of world growth, either someone else has to come up with a deficit (which is large enough to make a difference) or the surplus countries have to reduce their surpluses.

But oil prices are now unexpectedly high and oil producers, who are trying hard to spend, will almost certainly have large surpluses in the near term than previously thought. Japan has zero or close to zero inflation and growth is not so very strong, so its interest rates remain appropriately low. This will likely prove consistent with a continued surplus -- although this has been driven by high savings in the corporate sector; they have reduced debt levels over the past 10 years so they are now very similar to other OECD countries, but it is not clear that they will now go out and spend more.

Now, contrary to some impressions, China is actually experiencing an appreciation in its real exchange rate -- mostly due to high inflation. In its Multilateral Consultation plan, China expressed the intention of rebalancing the economy more broadly (away from investment and exports and towards consumption), but including exchange rate flexibility. Even so, based on what we have seen in the past few months, a robust Chinese current account surplus is the foreseeable future. This is based on very strong performances, profits and savings in the corporate sector -- really the results of successful development. But still, in the near term, this part of the global imbalances is not getting smaller.

So again, if the US current account deficit goes down, and the surpluses do not go down, whose deficit will go up? This is the very big question of the day. How this question is answered is likely to have a first order impact on global growth.

Tuesday, 23 October 2007

The Chinese stock market is rarely out of the news as it continues its relentless climb into unknown territory. The higher it gets the further it will eventually fall. Japan in the later 1980s or the Nasdaq in late 2000 early 2001 appears to be the closest.

So where does the Hong Kong bourse fit in? It has not experienced anything like the same bubble creation (altough there are signs of one forming). Both bourses are in China so why not merge them?

The FT tackle this issue and conclude that it is mighty complicated. Of course it is all to do with capital flow restrictions and the lack of other investment opportunities for the Chinese to invest in.

It is ludicrous that company shares on the two bourses can have valuation gaps of up to 50%. This throws economics out of the window but it is all artifical and only serves to illustrate how out of kilter Chinese A stock prices have become.

What is interesting is that in China if a share price is going up it appears in RED. In the West red means a share price has fallen. Of course with a little thought one should not be in the least suprised.

When it comes to knitting together Hong Kong and China’s financial systems – the promise of which briefly propelled the territory’s benchmark Hang Seng Index past 30,000 points last week – this red light-green light discrepancy is the least of the two markets’ challenges.

Where ardent integrationists talk of possible “arbitrage mechanisms” that could help reduce a stubborn cross-border valuation gap, sceptics smell a red herring and argue that China’s strict capital controls make true cross-border arbitrage as likely as alchemy. Forty-nine Chinese companies have listed both mainland-traded A-shares and Hong Kong H - shares. PetroChina’s upcoming $9bn A-share offering in Shanghai will add another name to the ranks of China’s dual-listed companies. Ever since China’s stock market began its record run in the summer of 2005, sending Shanghai’s benchmark index up sixfold, dual-listed companies’ A-shares have consistently out-paced their H-shares.

The recent rally in Hong Kong has narrowed the gap. Jing Ulrich, chairman of JPMorgan’s China equities business, says that the average A-share premium has shrunk to 55 per cent on a weighted-average basis, and predicts it will narrow to 35 per cent by the end of 2008. Even so, share price discrepancies can still be substantial. Sinopec Shanghai Petrochemical and Sinopec Yizheng Chemical Fibre’s A-shares are trading at more than three times the value of their H-shares.

Last week, rumours that Chinese authorities were contemplating a share swap mechanism boosted Hong Kong shares and depressed Chinese ones. This reflected investor expectations that if real arbitrage were possible, H-shares would rise and A-shares fall until they reached equilibrium. How such arbitrage could be achieved so long as China enforces strict capital controls – making it impossible for mainland investors to buy shares freely in Hong Kong and vice versa – remains in dispute.

Joseph Yam, chief executive of the Hong Kong Monetary Authority, enlivened the debate in February, when he wrote about the creation of a channel between the two markets, possibly based on “certificates of ownership of shares listed on the Shanghai, Shenzhen and Hong Kong stock exchanges . . . traded in both markets with an arbitrage mechanism to equalise prices.

“I am sure there are many fine financial architects capable of designing a channel to link the two financial systems,” he said. “Admittedly, there are many policy issues to deal with. But now is the time to do it.”

In the ensuing nine months,Hong Kong government officials have echoed Mr Yam’s refrain with urgency, pointing to the A- share/H-share valuation gap as if it were a freak of nature that must be set right.

Their calls culminated with the government’s surprise purchase of a controlling 5.8 per cent stake in Hong Kong Exchanges and Clearing last month, in a move that the territory’s financial secretary said “underlines the government’s support for HKEx and enables the government, over the longer term, to contribute as a shareholder to the promotion of HKEx’s strategic development”.

The Hong Kong government controls the stock exchange’s board through appointment powers and bars any one party from taking more than a 5 per cent stake in HKEx without approval. For its part, the Hong Kong stock exchange has been notably cooler about the prospects for arbitrage opportunities, given China’s closed capital account. “The price gaps between the A- and H-shares reflect the non-fungibility between the Shanghai and Hong Kong markets,” the exchange said yesterday. “HKEx will consider any feasible plans it receives for an arbitrage mechanism.”

../

“A-share valuations are likely to moderate over time as earnings rise and new share supply is increased, while the QDII and through-train programmes will support a continued re-rating in H-share prices,” Ms Ulrich says. “As outbound capital channels continue to widen, the A-share premium is likely to narrow substantially, even before China’s capital account is fully open.”

Monday, 22 October 2007

Research paper from Review of International Economics (considered one of the top international economics journals after the Journal of International Economics).

Academic subscription required.

Given the pressure being placed on China to let its currency appreciate against the dollar it is interesting to investigate what the impact of such an appreciation would be. This paper suggests that a 10% appreciation would lead to 1% fall in exports. This intuitively seems to be in the right ballpark if not a little high.

Though China's share of world trade exceeds that of Japan, little is known about the response of China's trade to changes in exchange rates. The few estimates available have two limitations. First, the data for trade prices are based on proxies for prices from other countries. Secondly, the estimation sample includes the period of China's transformation from a centrally-planned economy to a more market-oriented one. We address these limitations with an empirical model explaining the shares of China's exports and imports in world trade in terms of the real effective value of the renminbi. The specifications control for foreign direct investment and for the role of imports of parts to assemble exports. Parameter estimation uses disaggregated monthly trade data and excludes China's decentralization period. We find that a 10 percent real appreciation of the renminbi lowers the share of aggregate Chinese exports by nearly one percentage point. However, the estimated response of imports is negligible and lacks precision.

Wednesday, 17 October 2007

Chinese companies are set to be Asia’s most acquisitive in the US or Europe next year, according to a survey of the region’s dealmakers.

Nearly 60 per cent of those polled believe mainland Chinese companies will outstrip rivals in countries such as India and Japan in outbound merger and acquisitions activity in established world markets.

Outbound acquisitions by Chinese companies have in recent years focused on investment in the resources sector in Africa and Latin America, while its leading financial services companies have stepped up overseas activity in recent months.

China is enforcing strict standards for its exports and will continue to work to regain consumer confidence in its products, especially during the upcoming holiday season, a top quality official said Wednesday.

Li Changjiang, head of China's General Administration of Quality Supervision, Inspection and Quarantine, said officials have taken substantial measures to ensure that goods are made by certified manufacturers with qualified materials.

There will be checks at various stages of production, Li said, and authorities will also make it easier for exporters with good records to quickly pass customs inspections _ all part of a four-month Cabinet-level safety campaign launched in August.

Yesterday the China stockmarket broke the important 6000 barrier. The current PEs are way out of line and close to 50.

The bubble will burst but the longer inflates the more trouble it is storing up and the harder it will be for the government to let it deflate. The danger therefore is that specualtors see this as a one way bet.

My predicitions have already been shot out of the water with the predictions posts a few posts ago looking quite possible.

The danger lurks in the background. WHO OWNS the shares. The trouble is that in many cases it is party officials, the ARMY and SEOs that own the shares. When it unravels it has the ability to induce serious political instability.

China's benchmark stock index broke the symbolic 6,000-point mark for the first time yesterday, as investors in the rampant market celebrated a sixfold increase in a little over two years.

The Shanghai Composite Index rose 2.15 per cent to close at 6,030 points on the day the nation's top leaders opened the 17th Communist Party Congress in Beijing.

The spectacular rise in stock prices has made Chinese companies some of the most expensive in the world and driven most analysts to warn of a growing bubble that could lead to social instability when it bursts.

"The market was a bubble when it reached 5,000 points and, of course, the same applies at 6,000," said Wu Chunlong, a strategist at Citic Jiantou Securities. "But with liquidity still growing quickly it is quite possible the market will continue to inflate up to 7,000 points."

In China, where the government still attempts to maintain tight control over most of the economy, the five-yearly congress is likely to have helped sentiment in recent weeks. The market dropped precipitously in May after the government introduced a higher stamp tax on stock transactions, but in the lead-up to this political pageant, investors correctly assumed that Beijing would do nothing to slow the bull run because of concerns a large drop could cause discontent among the new middle class.

The central bank has raised interest rates five times this year and lifted the proportion of deposits that banks must hold in reserve with the central bank.

In spite of this, the country is awash in liquidity and prices of everything from pork to property have been accelerating throughout the year. Chinese companies are rushing to sell shares and cash in on superlative valuations.

Unsurprisingly, more than a dozen stock brokerages have plans to make initial public offerings and, according to reports, Orient Securities plans to join them by raising $4bn in an IPO before the end of the year.

The stock frenzy has spilled over into the separate and more mature market in Hong Kong, where the benchmark index has risen more than 40 per cent since the end of August on expectations Beijing will allow mainland investors more access to the market in the near future.

PetroChina, which also plans to raise up to $8bn in a Shanghai IPO by the end of the year, rose 13 per cent yesterday in Hong Kong, taking its market value to about $426bn. After rising 65 per cent since the start of September, PetroChina now challenges General Electric for the title of the world's second-most valuable company after Exxon Mobil.

Tuesday, 16 October 2007

CurrencyTrading.net have written a useful introductory article outlining the main issues around China's vast forex mountain and what they are spending it on.

Fundamentally, China investing in US paper is a bad move - they would be better off investing it at home on education, health of social security given the low returns they are getting from US paper. Or it should be invested in worldwide equities (there are moves in this direction). US paper investments could end up being be the largest wealth destruction mechanism in history.

Whilst a good start this article gives China a little too much credit and suggests China wields more power that it really does.

For example, this statement is simply not true (although it does make a good headline).

Nowhere is this more apparent-and frightening-then in China’s economic relationship with the United States, which is very much at the mercy of China when it comes to prices, wages, interest rates, most importantly, the value of the Dollar.

One could argue that the value of the dollar is nowhere near as important as prices and wages. What does the value of a currency really tell us? If the dollar falls the US will export more (and import less) and their companies will make greater profits (input prices will however rise). More tourists will flood into the US spending money on in the US service sector and thus creating jobs. The problem, as the article points out is the possible effect on interest rates. A rise in interest rates could push the US into recession (linked to the housing market and the huge level of individual debt).

As the Dollar has depreciated over the last five years, many Central Banks have begun “diversifying” their forex reserves, by switching from Dollar assets to assets denominated in other currencies. This is problematic for the Dollar for two reasons. First, switching from US assets to European assets, for example, directly causes the Dollar to depreciate. Second, the bulk sale of US treasury securities (whether or not they are replaced with other US-assets) causes US bond prices to decline and hence, yields to increase. Thus, if China suddenly decided to diversify its reserves, for economic and/or political reasons, it could potentially crash the Dollar and send US long-term interest rates skyward. Since mortgage rates are tied directly to government bond yields, a rise in interest rates would probably also affect US real estate prices. Higher interest rates would make borrowing for a home more difficult, which would lower the demand for houses and thus, the value of American real estate.

../

Coupled with its growing role as the world’s factory, China’s cheap currency has made Americans wealthier, by increasing their purchasing power. As production of labor-intensive goods was outsourced to China over the last decade, prices for finished products began to fall both in real terms and in nominal terms. While the effect on US employment trends is debatable, its effect on prices has been unambiguous. Thus, even while the American economy boomed, inflation remained relatively modest by historical standards. This allowed the Federal Reserve Board to hold interest rates down and foment economic growth.

FT article looking at how the famous "Chinese price" is coming under increasing upward presure.

What is remarkable is that the last 5 years have seen "deflation" until the recent rises. No wonder Western manufactures were feeling squeezed and were moving production to China in their thousands.

One interesting observation is that the reason prices were so low for so long and why prices have taken so longer to pick up speed is the relocation of factories from the coastal hubs to the less developed regions where there is still a plentiful supply of cheap labour and improving infrastructure.

Here is a quote I never thought I would see:

"We have stopped our sock production because we can't find enough workers."

Even in China the economics of scarcity hold. More importantly there is also a shortage of skilled labour that may be more pressing and requires the Chinese government to invest more heavily in the domestic education system.

The "China price", that once unbeatable benchmark retailers pay for the products made in the world's workshop, is not what it used to be. Data compiled by statisticians in China, Hong Kong and the US all show that, after at least five years of deflation, Chinese export prices have begun to creep up over the past 18 months.

"China's era of exporting deflation to the world is coming to an end," says Jing Ulrich, Hong Kong-based chairman of JPMorgan's China equities business. "Manufacturers are raising their average selling prices and feel confident they can pass on any future [cost] increases. Pricing power has returned to a number of industries due to consolidation, the closure of smaller producers with poor environmental and safety records and natural attrition over the past half-decade, when many manufacturers faced severe margin compression."

../

Jonathan Anderson, an economist at UBS, cites Hong Kong statistics because "they are closest to the Chinese factory gate". These show the China price inflating at about 3 per cent a year.

../

The wonder, however, is that the China price has not been accelerating at a much faster clip - as it would have to before China's export juggernaut began to slow. The country's January-September exports grew 27 per cent to $878bn (£432bn, €620bn). As Jim Leonard, a Boston-based trader for East West Basics, a trade sourcing company, puts it: "Volume covers a lot of sins."

One answer to the riddle can be found in southern Jiangxi province. The region is famous for being the cultural homeland of China's Hakka or "guest" people, whose name derives from their itinerant history. But county governments in the area, near where Mao Zedong and his ragged band of peasant rebels began their Long March to power, are now playing host to a new generation of migrants - factory owners from Hong Kong, Taiwan and further afield, all seeking cheaper bases for operations away from China's coastal manufacturing hubs.

"We treat the companies that invest in our industrial park as gods," says Zhong Xuhui, vice-chief of Longnan county. "We assign a government official to serve each big company, helping it prepare administrative documents. Companies in our park don't waste their time and energy on paperwork."

../

Labour, land and power costs in the Pearl and Yangtze deltas, for example, have been rising at double-digit rates. There have been exponential price increases for essential raw materials such as copper and petroleum-based plastics. Now China's general level of inflation is setting off alarm bells in Beijing, having touched 6.5 per cent in August.

Adding to these pressures, the renminbi has appreciated by 7 per cent against the US dollar ever since it was allowed, three years ago, to drift from its mooring of Rmb8.30 to the greenback.

Mr Anderson argues that this last phenomenon is largely academic in export sectors where factories are merely turning around imported - and therefore often US dollar-denominated - components. But that has not stopped exporters from trying out the excuse anyway, especially last year when the renminbi crawled past the Hong Kong dollar, which is still pegged to its US counterpart at a rate of HK$7.80. And why not, asks Mr Leonard, who sources houseware products for American retailers. "You'd be crazy not to ask."

"Increasing labour and raw material costs are having a significant impact on my business," says Yu Zhonghua, owner of a hat and sock factory in Yiwu, in the Yangtze River Delta. "We have stopped our sock production because we can't find enough workers. Three or four years ago, we could easily find workers to make socks for Rmb900 [$120, £59, €85] a month. Now, even if we pay Rmb1,400-Rmb1,500, they think the job is too tiring and the pay not enough. Other small sock makers face the same situation."

../

The fact that the China price has barely budged relative to its underlying cost pressures is partly a reflection of how fat life was for China-based exporters - most of them owned by Hong Kong, Taiwan and other overseas investors - through the 1990s and the first few years of this decade. Stephen Green, a Shanghai-based economist with Standard Chartered, recently visited some of his bank's manufacturing clients in Shenzhen, across the border from Hong Kong, and says that net furniture margins there have fallen from an "unnaturally high" 30 per cent a few years ago to a more reasonable 10 per cent.

../

"It's hard to find skilled workers here [in Longnan]. That hurts our efficiency," he adds. While it takes three months to train a worker in Longnan, highly skilled workers can be poached from the Pearl River Delta's much deeper talent pool. The monthly wage rates at Top Form's three China factories sum up their capabilities: Rmb1,600 in Shenzhen, Rmb1,200-1,300 in Nanhai and Rmb1,000 in Longnan.

../

"[Manufacturing] activity is moving away from the coast," agrees Bruce Rockowitz at Li & Fung, a trade sourcing company with 16 offices on the Chinese mainland. "Where the product is today is not where it was yesterday. You can't look at [China] as one country. We look at it as a multi-country sourcing area."

Yet change beckons even for relatively new-found destinations such as Longnan. "In the beginning, we didn't choose what type of companies came here," Mr Zhong, the county's vice-chief, says in his thick Hakka accent. "But now we don't want companies that need lots of labour, consume too much electricity or occupy large tracts of land. We now welcome capitalintensive and high-tech companies."

When Top Form arrived in Longnan, hundreds of people would queue outside its gates looking for work. Now a gathering of 30 or 40 workers would be considered a good-sized crowd. As Mr Ho says: "We can never stick to one place for good. For now it's Jiangxi. But Jiangxi may not be competitive in five years' time. Maybe our next factory will be even further inland."

Monday, 15 October 2007

Here at chinaconomicsblog "beer" is never too far away from our minds. So imagine our delight in finding a "economics and beer" post on a law blog (Chinalawyerblog).

On a serious note, this small anecdote tells us a considerable amount about doing business in China and more specifically how tight the margins are in what amounts to probably the most capitalistic market in the world and fits the economists standard assumption of "perfect competition" the most economics models are based on.

Such thin margins are also a deterrent to multinationals wanting to supply the home market. As an export platform China remains a good place to do business. When one thinks of some of the problems with "quality" it is clear to see that this overriding pressure on margins forces some companies to cut corners.

I went biking into the hills nearby Beijing last weekend, and returned with a story about beer and profit margins, and learned more about why it is so difficult for some foreign companies to compete here. Somewhere in the hills a few kilomters off the main road, I ran out of water and found a small, very simple store that sold water, soap, snacks and beer. Here is a photo of the beer stacked outside the store.

The bottle of water cost 1.2 Chinese yuan (RMB), about US$0.17, and to my surprise the shopowner told me the 500ml bottle of beer was the same price. I was startled, since beer in Beijing costs a minimum US$0.26, twice that price, and I couldn’t see how anybody could profit on such cheap beer, especially since it needs to be transported so far to this store.

The shopowner told me that his cost for a bottle of beer is 1 Chinese yuan, about US$0.13, and therefore his profit on the sale of an entire crate of 24 bottles is about 24 x US$0.04 per bottle, or about US$1.

So, what I am wondering here is how do foreign brands compete? I think they answer is that at least in the beer industry they really can’t. There’s no way Chinese consumers are going to pay four times more for a bottle of Budweiser than the local beer.

Incidentally, if you have not read Chinalawyerblog before I can wholeheartedly recommend it. Although there is an element of car crash blogging jjb gives insights into life living and working in China not found elsewhere. It is a soap opera in blog form. Will he ever get his money? Will he be bumped off before he gets paid? Tune in to find out.

"As you can see the index is within a 100 points or so of my 5650 target. I think the next significant development will be a break of 800-900 points, about the same amount (arithmetically) as the last significant reaction. I should note that at about the 5800 level the market will have advanced the same percentage as the February-May rally. This is another reason to expect a stall in the 5600-5800 range.

After this next break is over I shall expect another leg up of about the same percentage as the current leg (70-75%). Such a move would put the index above the 8000 level."

You would have thought that as China grows and its exposure to the West increases that the government would loosen its grip a little on internet censorship.

This blog was started originally to be an aid for Chinese students looking to study undergraduate and postgraduate Economics and to provide impartial advice on what to look for in a school.

Given we have been censored pretty much from the start (due to being part of the larger google family of blogspotters) this has been a pretty much wasted exercise (publishing articles on environmental degradation and corruption probably does not help).

However, from today's news we read that China is employing more and more officials and improved technologies to ensure even stricter censoring of the internet in China.

One day perhaps Chinese students will be able to get good advice on where to study, all for free with no strings to the benefit of China in the long run. Until then we will continue to plough a lonely furrow.

HONG KONG (Reuters) - Internet censors in China are becoming more systematic and sophisticated in how they monitor the Web and eradicate content deemed sensitive, according to a Chinese technician working for an Internet firm.

In a report published on Wednesday by Reporters Without Borders and the group China Human Rights Defenders, the unnamed author details the secret workings of a censorship machine that spans the information ministry, the State Council, or cabinet, the Communist Party's propaganda department and the police.

"Prior to 2005, the Beijing authorities had not really organized an Internet control system," the report said.

Now it keeps close tabs on online public opinion, reporting daily and weekly to senior leaders, and employs various targeted tactics to keep Web sites in line in the world's second largest Internet market, with over 162 million Web users.

Many Web sites receive as many as five messages a day from supervisory bodies instructing them how to handle sensitive issues or ordering to reject, or pull down, certain content.

And the means through which the censors monitor and communicate with the Web sites have multiplied to include weekly meetings, e-mails, online instant messages through a handful of programs and even SMS text messages, the report said.

After a newspaper reported in 2006 that the Taiwanese electronics firm Foxconn, which makes iPods, mistreated workers, some Web sites received SMS messages saying: "Do not disseminate reports about the Foxconn case so that it is not exploited by those who want independence to advance their cause."

Some 400-500 "sensitive" or "taboo" words are banned, and Web sites self-censor these words to avoid fines, it said.

This year, the Beijing Internet information bureau made directives sharper, dividing them into three types, the first to be executed within five minutes, the second within 10, and the third within a half hour, the report said.

Violators face penalties.

In May, two popular Web sites -- Sohu and Bokee -- were fined for ignoring a directive not to run reports from sources other than the official Xinhua news agency regarding the death of Huang Ju, a senior leader.

In late 2006, Netease , one of China's top Web sites, imitated a South Korean site conducting a poll that asked readers if they were reborn, would they want to be Chinese again?

Of the 10,000 who responded, 64 percent said no, for various reasons. Netease had to fire the editor of its culture section and shut down the debate section, the report said.

For further control, the State Council Information Office organizes propaganda courses "to encourage better censorship and self-censorship practices," as has the municipal information office in Beijing, where most of China's biggest Web portals are based, the report said.

Executives and editors at online firms have also been sent on junkets to Communist heritage sites once a year since 2004 and forced to publish articles about them in what the author called another kind of ideological control.

"With less than a year to go to the Beijing Olympic Games, this report lifts the veil on appalling practices in China that make it one of the World Wide Web's most repressive countries," the introduction to the report said.

Gone are the days were one could simply show up, wave some money in front of an official, and have the EVA (Environmental Assessment) form overlooked. Gone were the days where a multinational could promise jobs and tax base to get a more favorable reading on an environmental reading.

Such a stark assessment relates well to our frequent "corruption" posts and issues related to the presence of multinationals in China (see labels) and the possibility that Western companies have been using China as a "pollution haven" to avoid strictly regulations (or stricter enforcement of regulations) at home.

It appears that Zhou Xiaochuan, China’s central bank governor, is on his way out.

Zhou Xiaochuan has been at the helm during a testing time for the Chinese currency and has instigated many reforms most of them not before time. However, I suspect that there is a feeling that he may have gone too far too quickly.

Moreover, the continued inflation of the stock market bubble hints at mismanagement of expectations although it is hard to see what else the bank could have done. There has been some revaluation and interest rate changes but with little effect.

The FT discuss this issue in more detail. What is remarkable about this article is the complete absence of any facts - this is all merely speculation and conjecture. Good to see even the FT resorting to such journalistic licence.

Zhou Xiaochuan, China’s central bank governor, is expected to be replaced in the wake of this month’s Communist party congress – with his chances of a promotion fading, say Chinese officials and diplomats.

../

An unusually activist central bank governor, Mr Zhou has presided over extensive reform of the state-owned banks and the de-pegging of China’s currency, the renminbi, against the US dollar in 2005. But his activism has attracted many critics within rival bureaucracies, most recently over a PBoC-backed plan to allow Chinese citizens to buy shares overseas, which has been wound back after the initial announcement.

The decision by the International Monetary Fund to establish a “currency surveillance mechanism”, a move that Beijing sees as directed at the renminbi, prompted internal criticism as well, Chinese economists said.

Mr Zhou may also have been caught up in political turmoil surrounding the recent abrupt departure of Jin Renqing, the finance minister, and a number of other senior officials, economists said.

Mr Zhou could have been expected to step down soon in any case, as he will have served five years as PBoC chief by December.

But his supporters had been pushing for him to be elevated into the state council, the cabinet, or even to one of the jobs as vice-premier, in charge of the financial sector.

The opaque nature of Chinese politics makes it difficult to say with any certainty what will happen to Mr Zhou, and some analysts suggested on Thursday it was too early to write off his chances of promotion.

The new cabinet, along with the vice-premiers, would usually not be formally named until next year, in the annual session of the National People’s Congress.

A decision by China to push ahead with further reform of the financial sector may play in Mr Zhou’s favour because of his deep experience in the sector and the respect that he has generated in the global investment community.

“China needs someone who is a recognised professional, not someone who doesn’t understand banking,” said a Beijing-based analyst.

../

The party congress, held once every five years is expected to last about a week. Nearly all of its deliberations are held in secret.

Wednesday, 10 October 2007

The important issue to consider is that the risk-reward ratio and got out of synch.

With low level officers being able to illicitly conceal millions of yuan and the chances of being caught so slim the temptation is often too great. However, what is China to do? They already have the death penalty for corruption - that is pretty much as large a deterrent as you are every likely to get.

Whenever a country goes through such an abrupt change corruption is simply inevitable. Look at the rise of the oligarchs in Russia. Corruption is part of the growing pains. The danger is that the pains get so large as to overwhelm the country.

The question is "will good money drive out bad money" in China or will it be the other way around (with the associated high costs).

Corruption costs China as much as 3 per cent of its economic output, or $86bn in 2003, and poses a “lethal threat” to the country’s economic development, according to a report by the Carnegie Endowment for International Peace.

The report by Minxin Pei, the director of the China programme at the Washington-based policy study group, says the sums of money expropriated by corrupt officials have risen “exponentially” since the 1980s and cost more than last year’s entire education budget.

Mr Pei said: “Even after adjusting for inflation, the sums of money looted by government officials today are astonishing – a relatively low-level official can amass an illicit fortune in tens of millions of yuan.”

Mr Pei calculated the cost to GDP using a “conservative assumption” that 10 per cent of land revenues, investment and government spending are “stolen or misappropriated”.

This benchmark is difficult to confirm but it meshes with anecdotal evidence from a number of officials, who privately say that about 10 per cent of the value of all contracts is set aside for illicit payments.

Despite a stream of high-profile corruption cases, including the arrest last year of Shanghai’s party boss and the execution this year of the former head of the national food and drug regulation body, the report says that in reality only a “small proportion” of officials tainted by corruption are punished.

“The odds of an average corrupt official going to jail are at most three out of 100, making corruption a high-return, low-risk activity,” the report says.

Speaking to foreign journalists in late September, Chi Yaoyun, deputy director-general of the Central Commission for Discipline Inspection, the party’s anti-corruption body, admitted that graft was a serious problem, especially in the finance sector and land transfers.

“We do not deny that to some extent in certain areas there is corruption,” Mr Chi said, during a rare tour of the committee’s offices.

But he blamed the practice on the fact that “the economy is undergoing profound structural change”.

Mr Pei, however, sees corruption not just as a stage of development but as a failure of political reform.

“The Chinese government has consistently resisted steps to further reduce the role of the state in the economy, increase judicial independence and mobilise the power of the media and civil society, even though international experience shows that only such full-fledged efforts can root out systemic corruption,” he said.

An interesting paper from John Tatom looking at US-Chinese relations specifically related to the valuation of the Yuan. This is a topic we have covered in depth in this blog. This is a useful addition to the debate.

He is correct to point out in the first line of the appendix that "China-bashing has become a popular US media and political sport."

From the abstract I would say that the author has made a good fist of addressing the key issues. The costs of floating must not be undereztiamted with any fall out potentially hitting the US far harder than currently envisaged.

ABSTRACT:China-bashing has become a popular US media and political sport. This is largely due to the US trade imbalance and the belief, by some, that China is responsible for it because it manipulates its currency to hold down the dollar prices of its goods, unfairly creating a trade advantage that has contributed to the loss of US businesses and jobs. This paper reviews the problem of the large trade imbalance that the United States has with China and its relationship to Chinese exchange rate policy. It examines the link between a Chinese renminbi appreciation and the trade balance and also whether a generalized dollar decline could solve the global or Chinese US trade imbalance. The consensus view explained here is that a renminbi appreciation is not likely to fix either the trade imbalance with China or overall. If these perceived benefits of a managed float are small or non-existent, then perhaps they should be pursued anyway because of small costs or even benefits for China. Section IV looks at the costs of a managed float in terms of the benefits of the earlier peg. Opponents of a fixed dollar/yuan exchange rate ignore the costs of a managed float for China, especially with limits on currency convertibility. These costs are outlined here in order to provide an economic basis for the earlier fixed rate and China's reluctance to appreciate. Finally it is suggested that the necessary convertibility on capital account, toward which China is moving, could easily result in yuan depreciation under a floating rate regime. This is hardly the end that China critics have in mind and it is not one that would improve US or other trade imbalances with China.

ABSTRACT: This paper studies the relationship between multinational firm proximity and the formation of new export connections by private Chinese exporters between 1997 and 2003.The results indicate that growth in the presence of multinational firms is positively associated with the formation of new trade by local Chinese firms. Further exploration suggests that information spillovers may drive this result, as the positive association due to own-industry multinational presence is particularly strong in contexts where information improvements may be the most helpful. Thus, it appears that a growing presence of multinational firms may enhance the export capabilities of local domestic firms.

Yang Huiyan shot to the top of the China Rich List after the firm her father founded floated on the Hong Kong stock exchange in April, creating five billionaires at once.

Her low-profile father, Yeung Kwok Keung -- who worked as a farmer and on construction sites before making his fortune, according to Chinese media -- had transferred his stake in Country Garden Holdings Co. to his daughter in 2005.

Also Asia's richest woman, the Ohio State University graduate this year married the son of a top Chinese official she met on a blind date, the China Daily reported.

She is one of the few on the list to have inherited her wealth, in a country where booming economic growth has created fortunes virtually overnight.

The economy has expanded so fast that the country's 40 wealthiest people are now all dollar billionaires, compared with just 15 last year, Forbes said in a press release.

Their combined net worth more than tripled to $120 billion, from last year's $38 billion, Forbes said.

But as the number of the super-rich grows, officials in Beijing are stepping up efforts to tackle the gulf between rich and poor because they fear it threatens social stability.

Real estate was among the most lucrative sectors. Eight of the top ten have big property development interests.

"Household incomes are rising rapidly, and a growing number of people are moving into cities from rural areas. Those trends are creating great business opportunities for property developers," said Russell Flannery, Forbes senior editor and compiler of the China Rich List.

Country Garden, based in the southern city of Guangdong focuses on building villas, townhouses and large apartments.

Yang's father is still chairman and chief executive while she sits on the board as an executive director.

Last year's number one on the Forbes list, Wong Kwong Yu, slipped nine places to squeeze into the top ten, even though his fortune rose by nearly 50 percent.

Forbes compiles its list by looking at stakes in listed and private companies and other assets. It excludes Hong Kong residents like tycoon Li Ka-shing -- estimated by Forbes to have a $22 billion fortune in January.

China’s state media has broadcast statistics for some of China’s recent high profile corruption cases.

Out of the 16 recent cases where high-ranking officials were sacked for corruption, fourteen of the offenders had illicit lovers.

Some of the most notorious recent scandals have involved sexual misconduct, like the former mayor of Shanghai who stole from pension funds partly to finance a string of mistresses.

The top prosecutor's office has opened its files, it says, to draw attention to the fight against corruption.

Some observers see the new moral mood as a sign that more official misdeeds will be exposed and punished, others believe it may be a political manoeuvre to manipulate certain officials out of office.

As one can clearly observe, there is not a lot of fact presented in this article and little evidence of in depth research. However, the title alone justifies a link from this blog.

We should perhaps provide some comment. The bottom line is that this headline is not really so surprising. Sex in all its guises is undoubtedly the motivation for a wide range of misdemeanors, corrupt practices included.

Whilst there is nothing particularly new in this article it does provide some good descriptive meat on the bones of the horrendous statistics trotted out in this and other blogs looking at the environmental problems in China. A key resource is the Elizabeth Economy piece

What is interesting is the level of community action that is taking place in spite of the economic consequences of doing so. Talking about the city of Wuxi:

By September, the city had closed or given notice to close more than 1,340 polluting factories. Wuxi ordered the rest to clean up by June or be permanently shut down.

Then we have the offical Chinese view - economics in action:

The actions were applauded by Chinese Premier Wen Jiabao, who has vowed to use economic incentives and punishments to aid in environmental protection and resource protection.

But here is the crux of the issue and why a permanent solution is some way off:

China has been searching for years for a way to fix its environment without hurting its economy. China has closed vast swaths of polluting factories in the past, only to reopen them when unemployment rose too high.

A worthy three page read. Some of the highlights are included below. My bold.

WUXI, China -- One morning this summer, residents of this eastern city awoke to find that their beloved Tai Lake had turned rancid. The water was filled with a bloom of blue-green algae that gave off a rotten smell. It was not only undrinkable; it was untouchable. Few living things stirred in the water.

For almost three decades, the city had welcomed some of the world's biggest polluters. Churning out paper, photographic film, dye, fertilizer, cement and other products for the global marketplace, the businesses helped make Wuxi into one of China's wealthiest industrial cities.

They also poisoned the province's vast network of lakes, rivers and canals. In late May, when the toxic sludge reached Tai Lake, which is the main source of potable water for Wuxi's 5.8 million residents, people turned on their taps and got only sludge.

City officials decided they'd had enough. In a series of radical proclamations that sent shudders though the business community, Wuxi declared itself a newly reformed green city.

By September, the city had closed or given notice to close more than 1,340 polluting factories. Wuxi ordered the rest to clean up by June or be permanently shut down. The actions were applauded by Chinese Premier Wen Jiabao, who has vowed to use economic incentives and punishments to aid in environmental protection and resource protection. Last week, China's State Council approved an environmental plan that includes reducing major pollutant discharges by 10 percent by 2010. Plagued by water shortages, choking on dusty air and alarmed by a sharp increase in pollution-related diseases and deaths, China has been searching for years for a way to fix its environment without hurting its economy. China has closed vast swaths of polluting factories in the past, only to reopen them when unemployment rose too high.

Elizabeth Economy, a fellow at the Council on Foreign Relations and author of "The River Runs Black: The Environmental Challenges to China's Future," said this time "the commitment, the profile, the energy behind the state's environmental protection efforts far exceeds anything we've seen in China's history.

"It's not about new ideas, but about enforcement. . . . What is changing are the incentives or disincentives."

On the other hand, Economy said, it remains to be seen whether local officials will follow the central government's lead. "They have never had the bottom-up pressure that makes them change their practices, nor a top-down mechanism for providing the right incentive to make it easy to do the right thing," she said.

This year, some cities are taking measures that show that their officials are beginning to make the environment a higher priority than raising the gross domestic product, a fundamental shift in thinking for a country that can attribute much of its early development to being the place to which others outsourced their pollution.

In recent months, the State Environmental Protection Administration has armed local governments with a new set of tools for punishing polluters. Banks now have the right to deny loans to polluting companies. Officials are able now to force violators to issue humiliating public apologies in newspapers or television announcements detailing their crimes. And utility companies are empowered to raise electricity, gas or water rates for companies that consume too many resources.

The result has been devastating for a growing number of companies.

In Heilongjiang province in the northeast, officials this month announced that they had kicked out 100 polluting enterprises that were sending industrial runoff into a river that empties in Russia. In Shanxi province, the country's largest coal-mining area, officials have closed down most industry in a county whose outdated machinery polluted waterways. And in Inner Mongolia, the government closed a production facility for one of China's biggest companies, Mengniu Dairy, because it had been operating without wastewater processing facilities and discharging waste into the Yellow River.

Ventures that are fully or partly owned by foreigners have also been caught in the inspections. This month, Unilever China, which makes soap, shampoo and other cleaners, was fined and ordered to reduce production because of excessive discharges.

In Wuxi, in the Yangtze River delta about 80 miles from Shanghai, city officials said it was too early to quantify the economic impact of the factory closings. But Li Yuanchao, the governor of Jiangsu province, where Wuxi is, has said, "We are paying back to nature -- even if our GDP decreases by 15 percent."

Liu Yamin, chief of Wuxi's Environmental Protection Bureau, acknowledged that as the city transforms itself from dependence on industry to a focus on high-tech research, there will be growing pains.

../

Wuxi was one of the regions targeted under Deng Xiaoping's "opening up and reform" industrialization push in 1978. The area, once known as the "land of fish and rice," was transformed into the heart of China's chemical industry. Its economy ballooned from 2.5 billion yuan in 1978 to 330 billion yuan (about $44 billion) in 2006 -- bigger than that of Ecuador or Luxembourg.

In most developed countries union membership is falling as economies undergo the transition from manaufacturing to services where labour is harder to organise.

When it comes to political party membership things are not a lot better with election turn outs often being woeful.

It is interesting to note therefore that in China membership of the CPC has been increasing.

The questions of interest are:

1. Do we believe / can we trust these figures?

2. Assuming the figures are correct it is an interesting economic exercise to ponder exactly why membership is increasing. Note the large increase from college graduates. Now assuming that individuals are attempting to mazimise their incomes it is not surprise that more and more college graduates are joining. The saying "it is not what you know but who you know" rings true in the developed world and it is clear that being a CPC memeber can only HELP you job prospects. To not join given the competetion for jobs would therefore be sub-optimal.

Moreover, an examiniation of the backgrounds of the top Chinese entrepheneurs would indicate that a large percentage are the children of top party officials.

In blunt terms, being a party member pays. Hence the incease in membership. It is simply a rational economic decision.

The number of Communist Party of China (CPC) members has reached 73.36 million, an increase of 6.42 million over 2002, according to the Organization Department of the CPC Central Committee.

On average, about 2.4 million new CPC members enrol each year, department statistics show. From 2002, when the 16th CPC national congress was held, to June 2007, the CPC has welcomed 13.16 million new members.

Twelve percent of the new members over the last five years had previously been recognized as model workers and 32.5 percent were college graduates.

By June this year, there were about 3.6 million grass-roots CPC organizations, up 142,000 over 2002, the department said.

China, faced with a continued rise in commercial bribery cases, has warned multinational companies they are among its targets as it seeks to weed out corruption.

The warning came as the Supreme People's Court announced that the number of commercial bribery cases dealt with by courts nationwide rose to 4,406 in the first seven months, 8.2 percent more than in the corresponding period last year.

Li Yufu, deputy director of the leading group on anti-commercial bribery under the Central Committee of the Communist Party of China (CPC), said that China will strengthen its cooperation with other countries to expose and punish multinationals who are engaged in commercial bribery in the country, while ramping up efforts to bring to heel those Chinese nationals who fled abroad after committing similar crimes.

Monday, 1 October 2007

ChinaDialogue interview Pan Yue, deputy director of the country’s top environmental watchdog,a on the success or otherwise of China's crackdown on polluters.

The shift in Chinese policy from "big stick" to more integrated economic system is to be welcomed. Incentive mechanisms have to be made to work. The current system is too open to abuse and regulatory capture from local (corrupt) officials.

The key question to look for is "why does China not have any green economic polices". The answer is predictable but it is good to see it spelled out.

However, there are clearly some signs of progress and willing on behalf of the government.My bold.

Crackdowns on polluters have had limited success in curbing China’s ecological crisis. Pan Yue, deputy director of the country’s top environmental watchdog, talks to Ma Li about green economics, and why now is the time for a change in strategy.

In a change from the previous strategy of “environmental storms” – strict crackdowns on polluters – Pan Yue, the deputy director of China’s State Environmental Protection Administration (SEPA), proposed seven new green economic policies in a speech to the China Green Forum on September 9, 2007. The emphasis has shifted from the so-called “big stick approach” to a more practical, economic approach to environmental protection.

In this interview, Pan admits that while crackdowns have had positive effects, they do not help to create systems -- and the changes they bring are far below expectations. Pan now wants to see green economic policies put in place, and change the rules of the game.

Ma Li: What are the reasons behind this shift from the “big stick approach” of environmental crackdowns to the search for new economic policies to solve environmental problems?

Pan Yue: Four major crackdowns have taken place since early 2005, and they have had positive effects. But to be honest, the results are far from what we might have hoped for. A number of limitations – restrictions on lawful punishments, limited scope and over-reliance on local enforcement agents – mean that the crackdowns have failed to alter the situation and put a durable system in place.

It has always been our aim to build systems, and so it’s a great shame to find ourselves in this situation. Legal crackdowns have resulted in nothing more than a tug of war. We need to change the rules of the game, and put green economic policies into place. We’re now going to shift from traditional administrative measures to using economic policies – and then to large-scale legislation.

PY: China’s environmental problems involve politics, the economy, society and culture; they are far more complex than the problems faced by developed countries. It’s unrealistic to expect one or two policies to fix it all. All I can say is that, to date, environmental economic policies have been found to be the most effective ways of creating long-term systems.

However, this is a more difficult undertaking than the crackdowns. It can either keep everyone happy or it can be effective, but not both. There will be conflicts of interest between government departments and between regions and industries. The public will also have high expectations, which the final outcome may not meet. We’ve tried in the past, and come up against these setbacks and failures, but we must remain calm and determined.

ML: Other countries are using green economic policies, and Chinese academics have raised them in discussion. Why does China still not have any?

PY: There are a lot of reasons for this, but perhaps the most important is that they would affect the powers and interests of many government departments, regions and industries. When a new policy conflicts with established interests it is likely to be set aside.

Therefore, the theoretical discussion of these policies is not enough – I want to call on the economic authorities and any authorities with an environmental remit to work together in developing policies to curb emissions and energy use. And let me make this clear, we would be happy to play a supporting role if any economic authority wants to take a lead in making this happen.

ML: The “green credit” system was put into operation this year. How is it progressing?

PY: In July 2007, SEPA, the People’s Bank of China and the China Banking Regulatory Commission (CBRC) published a paper about how to use environmental policies and regulations to reduce credit risk. SEPA and the People’s Bank of China have entered the details of 15,000 breaches of environmental law into a database that has been made available to commercial banks. Some of those banks are now using that information to refuse credit to companies that have broken environmental laws in the past. The CBRC has also sent banks a blacklist of companies that have polluted certain river basins and are not to receive credit. Some overseas banks, such as Standard Chartered Bank, are also planning to work with us on green credit.

ML: How would you evaluate this experiment? Based on its progress so far, could you call it a success?

PY: It’s too early to say it’s a success. But the current state of the environment doesn’t allow us to wait until we’ve come up with flawless policies. We need to evaluate, research, experiment and reach conclusions – all at the same time.

ML: Trials of compulsory environmental liability insurance are about to start. Can you tell us where those trials will take place, or what the actual policies are?

PY: Currently we’re working on this with the China Insurance Regulatory Commission (CIRC) and putting together plans and supporting technology for the trials. We still need to clarify further the actual scope of compulsory insurance, define liabilities, compensation standards and processes. The actual locations and industries have not yet been finalised.

ML: PetroChina and Sinopec have both said that large industrial enterprises should not be covered by these rules, on the basis that they have ample financial resources with which to cover any environmental compensation costs. What’s your opinion of this?

PY: Neither of those companies has formally presented that view to SEPA, so it is not a question I can answer. All I can say is that there are examples abroad of petrochemical firms that incur huge bills for compensation after major incidents. These firms also need to have environmental liability insurance to spread the risk.

I hope large state-owned enterprises will look at participating in this system. As to whether it will be made compulsory for these firms, we’ll need to look at that during the trials, and listen to a range of opinions.

ML: Environmental tax has been talked about for many years, but progress has been slow. Why is that? Will there be any progress over the next two years?

PY: The planning and implementation of green taxes is an incredibly complex task. Designing the tax itself and its relationship to other taxes, setting the tax rate, the cost of collection and analysing its impact on the economy – it’s not going to happen quickly.

The good news is that it is now on the agenda. The State Council’s plans for reducing emissions and energy consumption actively call for research on green taxes, and the Ministry of Taxation is actively looking at using a tax to bolster environmental protection. With the current pressure for reductions in power use and emissions, a breakthrough on this issue can be expected in the near future.

ML: We have heard a lot about environmental compensation over the past two years, but have not seen any progress. What’s holding it back, and how are the environment authorities going to push it forward?

PY: Some localities have been actively exploring environmental compensation mechanisms. But in general, progress has been slow. It affects many different interests, and there is not yet any clear legislation provided or a debate over the source of funding, distribution channels, methods and standards. There is also a strong degree of departmentalism, with no single framework or plan for implementation. Many well-designed policies get lost in “further discussions” between different government departments.

Establishing an environmental compensation policy should focus for the moment on protecting water resources. This will create the conditions for a more general policy. This should also be a method of transferring funds from developed areas to less-developed areas, from cities to villages and from wealthy populations to the poor. It should transfer money from the lower reaches of rivers back to the source, and from polluting industries to clean enterprises. When it is successfully implemented, it will lay the foundations of a fair system.

Background: the road to the new green economics

When Pan Yue revealed his plans for seven new green economic policies to the China Green Forum on September 9, he called on the economic authorities and government departments responsible for the environment to work together in researching and conducting trials of these proposals.

Pan’s proposed policies include green taxes, which would tax individuals or groups based on their use or misuse of environmental resources.

Green capital markets would leave polluting enterprises unable to obtain credit, or do so only at punitive rates of interest. Polluters would be unable to issue bonds or increase their investments, while environmentally-friendly firms would enjoy lower interest rates and other benefits.

Environmental insurance policies would force polluters to take out insurance against environmental risks. In the event of a pollution accident, the insurers would pay compensation to the victims.

Pan has revealed that SEPA’s next step is to join forces with the Ministry of Finance for research and trials on environmental tax and compensation policies. The China Securities Regulatory Commission will audit the environmental records of listed companies. The CIRC will hold trials of compulsory environmental liability insurance, and the Ministry of Commerce will strengthen its oversight of export firms’ environmental standards.

SEPA and its partners hope to unveil these policies within a year, says Pan, and have trials up and running in two years. This means, he says, that the first stages of China’s green economic policies should be in place within four years.

About me

This blog is written by Rob Elliott, an academic economist, with an interest in the Chinese economy and its local and global implications. .This blog is politically neutral..I am currently a Professor of International Economics at the University of Birmingham.Find me at my homepage.

Subscribe via email

Google+ Followers

China Economics Blog Bookshop

Book of the Month

Review: Jim Rogers first caught my eye back in 2001 when I read Adventurer Capitalist. In it he highlighted China and commodities. By then I thought I had missed the boat - commodities were already on the up (but went much much higher) and shares in China were going nowhere (and still didn't for a few years) before the recent explosion. Jim is a good writer and was in some ways ahead of his time.